The U.S. Securities and Exchange Commission (SEC) seems to have taken a step back in regulating the crypto sector as it recently removed the first formal definition of “digital asset” from its latest hedge fund rule. Although initially included in the proposed 2022 disclosure overhaul for hedge funds, the definition was omitted in the final rule approved by the commissioners. The SEC explained its decision by stating that the term is still being considered and will not be adopted in the rule at this time.
This development comes while the SEC is actively addressing crypto matters, taking significant roles in both its enforcement actions and ongoing rule proposals. Last month, in contrast to the recent action, the regulator reopened a previously proposed rule that redefined the term “exchange” while explicitly adding decentralized finance (DeFi) to it. This move, which garnered criticism from industry participants and two SEC commissioners, aimed to bring crypto under existing rules.
Simultaneously, the SEC proposed another rule in February that could potentially restrict investment advisers from keeping assets at crypto firms. However, the withdrawn digital asset definition in this week’s hedge fund rule was neither extensive nor controversial, encompassing “virtual currencies,” “coins,” “tokens,” and distributed ledger and blockchain technology.
Nevertheless, the SEC continues without a formal definition of digital assets, although it remains a frequent topic in the speeches of Chair Gary Gensler and other officials. Anne-Marie Kelley, a partner at Mercury Strategies and former SEC official, highlighted the irony of the situation: “The SEC is a regulator that requires transparency from its registrants, but it is continuing to withhold regulatory clarity by not defining digital assets.” She added that the commission may have removed the definition for strategic reasons.
Despite lacking a formal definition, the digital asset sector’s growth and adoption cannot be denied. Hedge funds, private equity firms, and banks are becoming increasingly involved in investing in and lending digital assets. Consumer advocacy group Americans for Financial Reform applauded the SEC’s separate category proposal for hedge funds disclosing their digital assets.
On the other hand, the Securities Industry and Financial Markets Association, an industry lobbying group, argued that the removed definition’s wording encompassed non-security digital asset classes, such as commodities, bitcoin, and non-fungible tokens. They requested a more specific definition.
In conclusion, the recent decision by the SEC to remove the digital asset definition from its hedge fund rule indicates that regulatory clarity still eludes the crypto sector. While the agency continues to address crypto regulation and integrate digital assets and related services into existing rules, the lack of an official definition for these assets leaves room for debate among stakeholders.
Source: Coindesk
